Recent changes to tax laws in the UK have meant that the annual accounts, accounting and record keeping for trusts with UK settlors and beneficiaries now needs to be much more detailed. Assets in a trust also need to be segregated to ensure that the trust remains tax efficient.
This article explains why this is so important and how to help ensure that the accounting and record keeping are undertaken correctly.
Scope Beyond the UK
The UK Government has seen an opportunity to increase the tax revenue from its residents in terms of the definition of receipts from an overseas trust. It is likely that other Governments will follow and introduce similar rules. Trustees of all trusts, whether or not they currently have UK settlors or beneficiaries, should therefore be aware of this situation and be prepared to take measures to deal with it efficiently.
The Importance of Residence
Trustees should appreciate that even if the income of a trust and the gains of a trust are not taxed in the jurisdiction in which the trustees reside, the tax authorities in the countries of residence of the settlor and the beneficiaries may levy taxes on the income and the gains.
In the UK, gains and income may be taxable on the settlor, even if not distributed, depending on where these gains and income are and the residence and domicile of the settlor. Gains and income may also be taxable on beneficiaries when distributions are made, although credit would be given for any tax that has been paid in respect of the settlor’s tax liability.
UK Settlors and Beneficiaries – Segregation of Assets
The rules are complex for UK settlors and beneficiaries, but if the assets of the trust are structured correctly the use of a trust can remain advantageous.
In order to make tax efficient distributions, trustees must keep and record the following items separately:
Trustees therefore need to ensure that, if, for example, a settlor settles money into a trust, which is to be retained in cash at a bank, this money should not be mixed with any gains or income. Bank interest on this money would therefore need to be paid into a separate income account.
As long as assets are physically segregated into income, capital gains and clean capital, it is possible to plan distributions to UK resident beneficiaries in a tax efficient manner.
The Negative Tax Impact if Income, Gains and Capital Become Mixed
If income, gains and clean capital become mixed, the UK tax authorities will follow pre-determined rules to decide what has been distributed. These rules assume that monies generating the highest levels of tax revenue are distributed first. When receiving a distribution from a trust, beneficiaries are required to apply these rules when filling out their self assessment tax returns. They are therefore likely to pay a higher level of tax than if tax efficient distributions had taken place from funds which had not been mixed.
The Important Role of the Trustees
Trustees must ensure that, wherever possible, trust assets are kept physically separate.
Where assets are already mixed, trustees need to keep records that analyse the composition of a mixed fund in order for them to advise a beneficiary which income or gains are being distributed to them, following the rules set out by the UK Parliament. Without this information from the trustees, the beneficiaries are not able to comply with their statutory tax obligations.
Trustees will need to maintain and provide accounting records that clearly show the analysis of the mixed fund. These records need to detail the type of income and gains, whether these have been mixed, a history of distributions from the mixed fund and a time line for these events. Trying to unravel these many years later would be difficult and costly and might even be impossible to achieve.
Summary
Trustees of trusts with UK settlors and beneficiaries need to separate taxed and untaxed income, taxed and untaxed gains, and capital. This information is essential for trustees and their advisers to:
If you require additional information on this topic, please contact:
Christine Breitler at the Dixcart office in Switzerland: christine.breitler@dixcart.ch or
Julia Wigram at our office in the UK: julia.wigram@dixcart.com
This article explains why this is so important and how to help ensure that the accounting and record keeping are undertaken correctly.
Scope Beyond the UK
The UK Government has seen an opportunity to increase the tax revenue from its residents in terms of the definition of receipts from an overseas trust. It is likely that other Governments will follow and introduce similar rules. Trustees of all trusts, whether or not they currently have UK settlors or beneficiaries, should therefore be aware of this situation and be prepared to take measures to deal with it efficiently.
The Importance of Residence
Trustees should appreciate that even if the income of a trust and the gains of a trust are not taxed in the jurisdiction in which the trustees reside, the tax authorities in the countries of residence of the settlor and the beneficiaries may levy taxes on the income and the gains.
In the UK, gains and income may be taxable on the settlor, even if not distributed, depending on where these gains and income are and the residence and domicile of the settlor. Gains and income may also be taxable on beneficiaries when distributions are made, although credit would be given for any tax that has been paid in respect of the settlor’s tax liability.
UK Settlors and Beneficiaries – Segregation of Assets
The rules are complex for UK settlors and beneficiaries, but if the assets of the trust are structured correctly the use of a trust can remain advantageous.
In order to make tax efficient distributions, trustees must keep and record the following items separately:
- Taxed income
- Untaxed income
- Taxed gains
- Untaxed gains
- Capital
Trustees therefore need to ensure that, if, for example, a settlor settles money into a trust, which is to be retained in cash at a bank, this money should not be mixed with any gains or income. Bank interest on this money would therefore need to be paid into a separate income account.
As long as assets are physically segregated into income, capital gains and clean capital, it is possible to plan distributions to UK resident beneficiaries in a tax efficient manner.
The Negative Tax Impact if Income, Gains and Capital Become Mixed
If income, gains and clean capital become mixed, the UK tax authorities will follow pre-determined rules to decide what has been distributed. These rules assume that monies generating the highest levels of tax revenue are distributed first. When receiving a distribution from a trust, beneficiaries are required to apply these rules when filling out their self assessment tax returns. They are therefore likely to pay a higher level of tax than if tax efficient distributions had taken place from funds which had not been mixed.
The Important Role of the Trustees
Trustees must ensure that, wherever possible, trust assets are kept physically separate.
Where assets are already mixed, trustees need to keep records that analyse the composition of a mixed fund in order for them to advise a beneficiary which income or gains are being distributed to them, following the rules set out by the UK Parliament. Without this information from the trustees, the beneficiaries are not able to comply with their statutory tax obligations.
Trustees will need to maintain and provide accounting records that clearly show the analysis of the mixed fund. These records need to detail the type of income and gains, whether these have been mixed, a history of distributions from the mixed fund and a time line for these events. Trying to unravel these many years later would be difficult and costly and might even be impossible to achieve.
Summary
Trustees of trusts with UK settlors and beneficiaries need to separate taxed and untaxed income, taxed and untaxed gains, and capital. This information is essential for trustees and their advisers to:
- Ensure that distributions are made in the most tax efficient way possible.
- Make information available to beneficiaries to correctly complete their tax returns.
If you require additional information on this topic, please contact:
Christine Breitler at the Dixcart office in Switzerland: christine.breitler@dixcart.ch or
Julia Wigram at our office in the UK: julia.wigram@dixcart.com
Key Contact:
Julia Wigram
Director
Director
If you have any questions please contact Julia at
advice.uk@dixcart.com or on +44 (0) 1372 461400
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